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Coal rises from grave to become one of hottest commodities

Sep 09 2016 12:44
Rachel Morison, Weixin Zha, Ladka Bauerova and Mathew Carr

London - For all the predictions about the death of coal, it’s now one of the hottest commodities in the world. The resurrection may have further to run.

A surge in Chinese imports to compensate for lower domestic production has seen European prices jump to near an 18-month high, while Australia’s benchmark is set for the first annual gain since 2010.

At the start of the year, prices languished near decade lows because of waning demand from utilities seeking to curb pollution and amid the International Energy Agency’s declaration that the fuel’s golden age in China was over. Now, traders are weighing the chances of extreme weather hitting major producers and China further boosting imports as factors that could push prices even higher.

“It’s a commodity that’s been on a slippery slide for the past four years and it’s making a remarkable recovery,” said Erik Stavseth, an analyst at Arctic Securities in Oslo, who’s tracked the market for almost a decade.

“There’s a strong pulse.”

What could light up the market further is the occurrence of a La Nina weather pattern later this year. Last time it happened in 2010 and 2011, heavy rains flooded mines in Australia and Indonesia, the world’s two largest exporters. While some meteorologists have toned down their predictions for the weather phenomenon forming, “another strong forecast” would cause prices to rise further, according to Fitch Group Inc.’s BMI Research.

La Nina systems can last for as long as two years, occurring when the surface of the equatorial Pacific cools, shifting weather patterns across the world. Named by fishermen in Latin America, La Nina is the “The Girl,” which often follows an El Nino, or “The boy.”

The US Weather Service’s Climate Prediction Centre said on Thursday there’s a 35% to 45% chance of La Nina, compared with as high as 75% in June. While Australia says there is a 50% chance, Japan rates the possibility as high as 70%.

While zinc is this year’s best performing commodity, climbing more than 43%, coal is not far off. Contracts for delivery next quarter to Amsterdam, Rotterdam and Antwerp gained 31% this year, while Austra lian benchmark contracts rose 40%.

That compares with the Bloomberg Commodities Index of 24 raw materials, which rose 7.9% this year. Coal isn’t in the gauge.

Previous havoc

Back in February 2011, Australian prices were almost double today’s level as the last La Nina caused havoc to production and transport of the fuel from Australia to South Africa.

In an “extreme” La Nina scenario, prices for the next two quarters in Europe may jump as much as 18% and 27%, according to Diana Bacila, an analyst at Nena AS, an Oslo-based energy consulting firm.

Citigroup Inc. said in July that Asian prices may climb as much as 50% if rainfall caused by the weather phenomenon is heavier than expected, further tightening the market in addition to Chinese production cuts.

China’s imports jumped to the highest since December 2014 in August as domestic production fell amid a drive to curb overcapacity, close unprofitable mines and cut pollution.

China’s coal miners on Thursday agreed to coordinate production to help stabilize prices, with producers increasing output when the market is tight and cut production when there is oversupply, according to reports from Shanghai Securities News and Caijing.

And over in India, Coal India, the world’s biggest miner of the fuel, last week reported the lowest production in three years as heavy rains and protests cut its output. The miners are demanding more jobs and higher wages.

“Coal got a real boost from the increase in Chinese exports and also by the strike in India,” Barbara Lambrecht, an analyst at Commerzbank in Frankfurt, said by phone. “The rally has been surprisingly strong.”

Some scientists are sceptical that La Nina will have that much of an impact.

“Since the event is most likely going to be borderline or weak, the impacts on global seasonal climate is also expected to be weak,” said Anthony Barnston, chief forecaster at Columbia University’s International Research Institute for Climate and Society.

Still, just because the meteorologists are seeing the potential impact fading, “it doesn’t mean the forecasts can’t turn out stronger this month or next month,” Nena’s Bacila said by phone. "That’s the risk."

Even without a La Nina, coal has the potential for further gains.

"We’ve seen a pickup," Ivan Glasenberg, chief executive officer of Glencore, said last month on an earnings call.

There’s an absence of new supply, which "is good for the market, and what China does in terms of imports will be “the big factor,” he said.

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